Cost Accounting (14th Edition)

2. The pen is usually produced and sold at the rate of 240,000 units per year (an average of 20,000 per
month). The selling price is $6 per unit, which yields total annual revenues of $1,440,000. Total costs are
$1,416,000, and operating income is $24,000, or $0.10 per unit. Market research estimates that unit sales
could be increased by 10% if prices were cut to $5.80. Assuming the implied cost-behavior patterns
continue, this action, if taken, would
a. decrease operating income by $7,200.
b. decrease operating income by $0.20 per unit ($48,000) but increase operating income by 10% of revenues
($144,000), for a net increase of $96,000.
c. decrease fixed cost per unit by 10%, or $0.14, per unit, and thus decrease operating income by $0.06
($0.20 – $0.14) per unit.
d. increase unit sales to 264,000 units, which at the $5.80 price would give total revenues of $1,531,200
and lead to costs of $5.90 per unit for 264,000 units, which would equal $1,557,600, and result in an
operating loss of $26,400.
e. None of these
3. A contract with the government for 5,000 units of the pens calls for the reimbursement of all manufacturing
costs plus a fixed fee of $1,000. No variable marketing costs are incurred on the government
contract. You are asked to compare the following two alternatives:
ASSIGNMENT MATERIAL 429
Sales Each Month to Alternative A Alternative B
Regular customers 15,000 units 15,000 units
Government 0 units 5,000 units
Operating income under alternative B is greater than that under alternative A by (a) $1,000, (b) $2,500,
(c) $3,500, (d) $300, or (e) none of these.
4. Assume the same data with respect to the government contract as in requirement 3 except that the
two alternatives to be compared are as follows:
Sales Each Month to Alternative A Alternative B
Regular customers 20,000 units 15,000 units
Government 0 units 5,000 units
Operating income under alternative B relative to that under alternative A is (a) $4,000 less, (b) $3,000
greater, (c) $6,500 less, (d) $500 greater, or (e) none of these.
5. The company wants to enter a foreign market in which price competition is keen. The company
seeks a one-time-only special order for 10,000 units on a minimum-unit-price basis. It expects that
shipping costs for this order will amount to only $0.75 per unit, but the fixed costs of obtaining the
contract will be $4,000. The company incurs no variable marketing costs other than shipping costs.
Domestic business will be unaffected. The selling price to break even is (a) $3.50, (b) $4.15, (c) $4.25,
(d) $3.00, or (e) $5.00.
6. The company has an inventory of 1,000 units of pens that must be sold immediately at reduced prices.
Otherwise, the inventory will become worthless. The unit cost that is relevant for establishing the minimum
selling price is (a) $4.50, (b) $4.00, (c) $3.00, (d) $5.90, or (e) $1.50.
7. A proposal is received from an outside supplier who will make and ship the high-style pens directly to
the Class Company’s customers as sales orders are forwarded from Class’s sales staff. Class’s fixed
marketing costs will be unaffected, but its variable marketing costs will be slashed by 20%. Class’s
plant will be idle, but its fixed manufacturing overhead will continue at 50% of present levels. How
much per unit would the company be able to pay the supplier without decreasing operating income?
(a) $4.75, (b) $3.95, (c) $2.95, (d) $5.35, or (e) none of these.
11-38 Closing down divisions. Belmont Corporation has four operating divisions. The budgeted revenues
and expenses for each division for 2011 follows:
Division
A B C D
Sales $630,000 $ 632,000 $960,000 $1,240,000
Cost of goods sold 550,000 620,000 765,000 925,000
Selling, general, and administrative expenses ƒ120,000 135,000 ƒ144,000 ƒƒƒ210,000
Operating income/loss $ƒ(40,000) $(123,000) $ƒ51,000 $ƒƒ105,000